A complete Financial blog with special emphasis on news, analysis and fluctuation in Indian Stock Markets & its indices NSE Nifty and BSE Sensex. Constant tracking of tug-of-war between the Bulls & the Bears. Also read about various Asset class such as IPO, Bullion, Commodities, Mutual Funds, Real Estate among others.

Thursday, March 5, 2009

The merger of Reliance Industries and Reliance Petroleum is no more a new concept to the shareholders of Reliance Empire. RIL had earlier merged RPL with itself in the year 2002. But, over here we’re not speaking about the recently built refinery which is going to get merged with RIL. RIL had earlier conceived RPL in 1993 in Jamnagar and later announced a merger with itself in the year 2002. At that time, the RIL-RPL merger was carried out at the share swap ratio of 1:11, creeping-in a feeling of discontent amongst RPL shareholders on the reasoning of unfavorable ratio of merger.

Later in the year 2006, RIL again came up with plans of setting up yet another refinery in Jamnagar with the view to build a refinery with EOU status. This new refinery is expected to operate with capacity of refining 580,000 barrels per day. RIL had also offered 5% stake in its refining subsidiary to US energy major Chevron corp. Now Chevron has agreed to sell-off its stake in RPL.

My Views on RIL-RPL Merger:

The merger of RPL and RIL would create a global-scale refinery for RIL. The merged entity would be seen as the world’s largest refining capacity at a single location. It would also yield various benefits of synergies, savings in expenses and costs, and it might catapult RIL into an even bigger Indian giant than ever before, in the eyes of the world. The merger would also lead to reduction in the company's earning volatility & risks, with diversified operational presence. It would, in fact, reduce the risk the shareholders of RPL were exposed to as being a stand-alone refinery. Though, RPLrefineriy is touted as being one of the most sophisticated & integrated refinery in the world, it would have taken time to stabilize in terms of profits & higher GRMs in the current landscape of competitive environment & global recession.

ADVANTAGE: Reliance Petroleum Shareholders

Earlier, during the merger between RIL and RPL in the year 2002, the merger clause of share swap ratio was considered unfavourable by the RPL shareholders then. This time around the expectations were somewhat same from the RPL shareholders, on the grounds that RIL has more minority shareholders than RPL. At the time of announcement of the merger, the price ratio going by the then prevelant stock prices of RIL and RPL was around 1:17. Finally, the boards of the two companies announced the merger’s swap ratio at 1:16. This has turned out slightly positive for RPL shareholders, who had speculated the ratio of anywhere around 1:20 on the rationale that RIL has a running and a more established refinery.

Another aspect from which RPL shareholders would tend to benefit is they will get to swap their holding in RPL which is a stand-alone refinery for a much diversified RIL which has presence in various businesses apart from just refining.

RajivMemani of E&Y who advised RIL on the valuating merger said, "The valuation is fair and reasonable, we have assigned due weightage to relevant factors such as the market price of the shares, the earnings performance and the asset base of the company. The valuation considered all factors including the net asset value and the market price."

RBI Cuts Interest Rates:

Amid constantly declining inflation & lower than expected GDP numbers for the period October to December 2008, RBI governor D Subbarao has announced rate cuts in benchmark interest rates. Reserve Bank of India has lowered the repo rates to 5% and reverse repo rates to 3.5% from immediate effect. Both the benchmark rates are effectively lowered by 50 bps.

My Views: These rate cuts were somewhat discounted by the stock markets during the last week or two on the back of lower inflation numbers. This discounted feeling was further seconded by the fact that GDP growth numbers for the period October to December 2008 came below market expectation & witnessed a sharp slowdown.

Though, Corporate India seems to be content with the RBI’s decision signaling banking sector to further bring down their lending rates in the efforts to stimulate growth and economy. By cut in its key benchmark rates, RBI has clearly indicated to the lending institutions to lend more and not let its money remain parked idle with RBI.

Repo rates is the rate at which RBI lends to the banks & reverse repo rates is, conversely, the rate at which RBI borrows from the banks.

KekiMistry of HDFC, feels the reverse repo rate cut is more relevant than RBI'srepo step. "Currently, there are not too many banks that are borrowing under the repo window because there is so much liquidity in the system. So, everyone is parking money back to RBI through the reverse repo window. Hence, the reduction in the reverse repo is more relevant than the reduction in the repo rate because this means that there will be a further disincentive for banks to just go and park the money with RBI. It will mean that banks will be more willing to go out and lend money to industry, which is the need of the hour." (Source of this Quote: Economic Times)

Auto Sales reports robust sales in February:

Auto sales for the month of February rose unexpectedly for cars and two-wheelers. The recent efforts of lowering of interest rates by a few leading public sector banks had propped up demand for cars and two-wheelers among consumers who were postponing their buying decisions on the back of domestic slowdown and liquidity crunch. Though, Auto Analysts also attribute the rise in demand for automobiles to both declining interest rates and reduction in excise duty during the month of December 2008.

Leading two-wheeler manufacturer Hero Honda recorded a whooping 24% growth in sales followed by 13% for TVS Motors. Though, Bajaj Auto posted a 17% decline in sales for the February 2009. Even Tata Motors reported a 19% drop in sales.

My Views: However, this trend in reversal in fortunes of Auto majors may not be sustainable for long. March and April sales may not be up to the mark for the Automobile sector as the lag effect of the slowdown tightens its grip on the economy, and this even before the lag effect of stimulus packages announced by government and RBI come into effect.

Standing in Foreign Trade:

India’s exports for the month of January slipped by 15.9% on the back of severe recession in key developed markets of US and Europe. Lack of liquidity & consequent delay in demand of export led goods and services from India are touted as the key reason behind tumbling of exports in January.

On the other hand, imports witnessed a negative tick falling 18.1% in the month of January. This fall in demand for imports can be attributed to the over-all slowdown in the domestic economy on the back weaker GDP numbers for the quarter October to December 2008.

Director of ICRIERRajeevKumar on the above data said, “The magnitude of contraction in trade suggests that the GDP numbers could be as low as 4% in the fourth quarter. There is no reason to believe that the export data will be better in the coming months. The export figures are expected to stabilize around October as the global economy improves.”

GOLD: Technicals, Fundamentals &likely 'Bubble Formation'

Traditionally, Gold has a terrific store of value as ornaments and jewellery for retail customer and coins and bars for traders and investors. Recently Gold has shot up to unprecedented levels on the back of increased risks and uncertainties around the globe. Gold is known as a safe haven and usually offers inflation adjusted returns over longer term.

Is it a 'Golden' Bubble in the making ??

Technical charts of Gold indicate that it has rallied to crucial Resistance of Rs.15,550. Now, Gold movement can witness two possibilities: one being panic fall to Rs.13,000 levels and stabilizing near to those levels. Gold has a very crucial medium term support at Rs.11,200 which would determine its long term prospects. Though, Gold is highly unlikely to test such lower levels any time soon from the current levels of Rs.15000. However, some bullion analysts are predicting that Gold may stabilize near Rs.13000 levels in medium to long term horizon.

Chartists View: From the charts tracking gold prices of last 10 years, it can be clearly revealed as to how the prices of Gold has escalated starting from the year mid-2007. The roots of the current sub-prime crisis were sowed during the latter half of calender year 2007. So, expectedly the prices of Gold has slowly and gradually risen starting from the period July 2007.

Over the period of time, as the recent global incident of sub-prime crisis slowly graduated into a liquidity crunch, the prices of Gold started to take-off sharply in the last 12 months. Eventually, now the charts of Gold quite resemble the charts of Stock markets which formed a bubble in the last stage of its bull phase.

On the other hand, Gold also stands possibility of touching dizzying heights of Rs.17000 levels on the back of deepening global recession and indiscriminate printing of money by reserve banks the world over in a bid to revive their respective economies. There is every likelihood that Gold soar at higher levels & take a 'U' turn after recording new peaks above Rs.16500 levels.

Is Gold rally backed by Fundamentals?

But, history suggets that whenever there is a bubble in any asset class, Analysts and Market participants have always suppoted the rise in the prices as being on the back of certain 'Fundamentals'. Most of the time Analysts have failed to predict a bubble in any form of Asset class. In case of Commodity rally a year ago, they supported the surge in the prices of various Metals with the base reason being 'Depletion of Natural Resources'. For Food Articles they had come out with a logic of 'Declining Land ratio to Agricultural activities & Growing Population'.For Gold, the fundamental view-point that the Analysts are forecasting is 'Increasing Risk in world environment & fall in value of various Currencies in comparison to real-asset value of Gold.'

Will this reasoning of'Risk-Inverse' value of Gold hold true to enable the bullion to sustain at soaring levels? Only time will tell whether the Gold is, in deed, the commodity to reckon with or whether it will fall in line to its traditional value as being a mere'Inflationary Hedge'.

ALERT: Gold charts are somewhat indicating that its price is somewhere in the last few stages of bubble blast. The charts are resembling the over-exuberance that out stock markets used to depict a year back. Investors are suggested to be cautious while buying Gold at every higher levels & traders to follow strict Stop Loss while trading in Gold counters.

A 'MUST READ' FOR NEW INVESTORS:

Read my previous article on 'Strategy for Investment' which is a must read article for all New investors. It explains in detail as to how to approach the markets & strategizing 'Entry & Exit' related to stock specific decisions.

A Request to Readers:Readers are requested to post their views/queries/suggestion in the below given 'Comments' section. They can share their thoughts, positive or negative, through this interactive 'Comments' section which will make the blog much more interesting for the readers themselves, in gauging the response to the article & knowing different view points of various investors/traders.

Disclaimer: All data, content and/or reports posted by Viral Rajnikant Dholakia on this site are only for information and educational purpose of visitor/readers of this blog. It does not constitute to be a recommendation/offer/advice to buy or sell assets/securities in any form. Individuals/organizations are requested to take an informed call by consulting their Financial Advisor before acting on any matter/data published on this blog. This blog does not warrant of any kind of accuracy, adequacy and completeness of data, ideas or thoughts published in it. This site and Viral Rajnikant Dholakia assumes no responsibility or liability or loss or damage of any nature for your trading and investment decisions and its consequent results.

Bulls,Great article. In fact I would say that the content of ur articles is greatly enriched in your blog as compared to your commnets in Dr Krishna's blog. Thanks for holding the fort of educating investors.

Keep up the good work and please dont leave your readers in lurch like Dr krishna did.

Nice write up again. Way to Go!!!!. I wanted to know your opinion about the relation between Dollar value and India gold prices as I have read few places that above tech levels of 1000-1050 USD/Oz Gold can go upto 1300 as well as Dollar at a possible 53-54 Rs in another few mnths, dont you think at those levels Gold will touch 20K ?

'What do you think is a good price for Entry in RIL & LNT as I know they are your best long term pick.'

MY VIEW:

There is no doubt that RIL and L&T have proved to be Multi-baggar for its Long term investors. Both the stocks have consistently provided smart CAGR returns since their listing on the bourses.

RIL and L&T had established their all-time peak levels of approximately Rs.3200 & Rs.2300 respectively. Since then, RIL has falleny by whooping 63% and L&T by 74%.

VALUATIONS:

Valuations of RIL seem reasonable looking at the great long term prospects that this stock holds for its shaeholders, not to mention new finds from KG Basin and multi-fold increase in its profits in next 2-3 years from the current finds. But, RIL can still test its Oct 2008 lows of around Rs.950 odd if the weakness in the market persists.

L&T, on the other hand, looks relatively expensive. Though, the stock is battered from its peak levels, technically the stock has closed below its medium term support of Rs.690/-. This may drag the stock lower to around Rs.500-550/- in the next few months, if markets continue to falter.

RECALLING MY PREVIOUS ARTICLE ON 'STRATEGY FOR INVESTMENT':

Dear Mohit, if you must have read my previous article on 'Strategy for Investment', it clearly indicates that investors should not try to enter the stock based on any certain 'ILLUSIVE' levels.

Markets are not bound, by either Technicals or Fundamentals, to reach specific price actions as forcasted by any particular Analsyt/Layman, when it is dictated by the 'SENTIMENT' of its market participants.

So, it is always better not to attempt to TIME market entry as is intended by you. Go ahead with 'BUY IN SMALL QTY ON LARGER DIPS'. Even if the stocks come down further, you are sure that you haven't invested your whole life-time money in it. As it falls further you can average more, as per your strategy of buying more on larger dips.

NOTE: The word 'Larger' dips is important as averaging on every 3-5% fall wont be helpful in such bear phases, where prices keeps on grinding continuously.

The use of strategy will keep you away from 'Emotive' decisions & mental agony. It will make your process more structured in nature.

"I wanted to know your opinion about the relation between Dollar value and India gold prices."

MY VIEW:

Gold is trading a little lower than its peak price levels on the back of its value as 'Safe haven' and constantly weakening Rupee.

The domestic currency recently established a new low of Rs.52 per dollar, which makes IMPORTED Gold much more costlier in Rupee terms when compared with Gold prices of Dollar.

RUPEE-DOLLAR CO-RELATION TO GOLD PRICES:

Though, the current rise in Gold prices shall be attributed to both, weakeneing Rupee and rising prices of gold in international prices.

Weakening rupee may render imported Gold prices even more expensive in India, thus reducing its demand a trifle more than the one with international prices. And hence, volatility in the prices of the yellow metal once they test its peaks. Though, gold prices continue to re-test its peak levels again, as the uncertainty creeps-up in the global scenario.

It is important to understand over here that, a large chunk of India's demand in Gold is sourced from Imports.

SHIFT IN MONEY SPREADS:

The analytical charts of Gold over a period of last few years, clearly mirrors the sharp upward movements that we witnessed in Crude & Equity stocks just a little more than a year back.

This money which was parked in riskier asset classes like Equity markets have witnessed a shift to safer Gold. The funds are now lying parked in Gold & giving sense of 'Bubble Formation' in gold.

Usually, it is tough to predict as to when the 'bubble' will burst in any specific asset class. But, signs can spotted on looking at the charts of the bullion ranging from today & few years ago.

RECALLING THE STRATEGY OFSELL IN SMALL QTY ON EVERY RISE:

The notion riding behind this is, investors becoem increasingly wary about their capital & returns at every higher levels. Profit booking can be witnessed on every higher level. Al ready, the demand for Gold for jewellery and ornaments have come down on the part of the Retail investors. Now, the only demand that exists is from 'Investment led demand' from coins & bars and more recently through Gold ETF's.

Investors who have bought the yellow metal for trading activity can 'Sell' in small qty on every rise. It would be difficult of the Gold at its most peak.

Just like we do small savings for our future at regular intervals. The concept is the same, like booking profits in Gold at every higher rally from here.

Mohd's Query posted in previous blog entry, but went out of my sight and hence could not reply to it then.

MOHD'S QUERY:

"What is your opinion about Moserbaer. This stock now started correcting more. What are the prospects?"

MOSER BAER Q3 RESULTS ANALYSIS:

The Company posted a net loss of Rs.25.65 crore for the quarter ended Dec 2008, against Rs.20.4 crore of losses in the same quarter for the previous year. The company said the third quarter posed challenges on the solar photovoltaic side of the business.

MY VIEWS:

Moser Baer is a technology company with cutting edge technologies. It is a leading manufacturer of Optical storage media. It has also ventured into Solar Energy, home-entertainment space and next-generation storage formats like Blu-ray discs. More recently the company has also ventured into manufacturing of photovoltaic cells.

The Company has done well enough to venture into most of the 'EMERGING' sectors of the economy, which shall well be the centre focus in upcoming future. But, the company is currently operating in loss & showing slow improvement quarter over quarter. Usually, a new venture operation takes time to break-even & actually post operating profits.

It would be interesting to be seen as to when does the company manage to break-even from its business model & start earning profits? The Company has the stands chances of providing its investors with Multi-baggar returns, once its various businesses start showing stability & actually becomes earning accruing.

MULTI-BAGGARS RISK-REWARD RATIO:

Investors should understand that investing in ‘so-called’ Multi-baggar stocks & eventually earning such returns involves some degree of risk. More the risk, more the returns.

Also, determining multi-baggars is not a one-time process. The business needs to be verified & analyzed constantly every year. It cannot be like a 'Buy and Forget' proposition. Updating yourself periodically about the momentum in the company & its business is a must & remaining in tracking of the company prospects.

Lastly, it is highly unlikely that every Analyzed & researched stock turns out to be a multi-baggar. The ultimate potential of the stock earning a multiple return to its investor depends on long-term prospects of the company & future developments about the potential of the company's business operations & products & services.

Multi-baggars come attached with such 'riders' as uncertainty & low visibility among public. The stock price of Moser Baer has plunged dramatically along with the recent crash in stock markets from the peak of Rs.400 to more recently Rs.50/-. This some what depicts the 'Negative' feeling & expectations of the market participants towards Moser Baer.

QUOTE BY MOSER BAER EXECUTIVE DIRECTOR MR.RATUL PURI:

"Market dynamics and the environment in which the optical media business has been operating have improved significantly with input prices softening. We will continue to reap the benefit of the fall in prices of commodity-based raw materials and fuel in the next couple of quarters. With high definition drive prices falling, our focus on the blue-ray technology is starting to pay off."

Hi BullsIn my opinion Indian banks are safer to invest as the regulation and rules are tigher and innovative free run banking is not supported much. Except ICICI bank all other banks look solid. however bank stocks are sliding. Is there a good opportunity to SIP here? I am finding Punjab National bank, Axis Bank, OCB very very cheap. is it good to invest? What is your opinion also on IDFC, SREI infrastucture and Reliance Capital?Would appreciate a reply with an analysis. thanks Venu

India ( nearly 25% Of indian economy)has to catch up tochina(46% of china's economy) in manufacturing because thatcan sustain job creation in the long term considering ourcurrency exchange rate and also nearly 60% or more of indianpopulation lives on low paying agriculture labour who needbetter paying manufacturing jobs which consequently leads touplifting/ energizing the economy in general thusbenefiting whole society through BETTER LIFESTYLE foreveryone WITHOUT caste/religious DISCRIMINATION orCORRUPTION but only by MERITOCRACY (merit based system) likechina and POSITIVE RESULTS driven CHARITY/PHILANTHROPY,service sector though very important alone will not beenough to grow a decent economy. Tata's nano project tojumpstart the auto manufacturing industry is a right step inthis direction since this will create a lot of other nanodependent small business ( car parts suppliers) to grow exponentially and encourage new entrpreneurs which indiahas no shortage of., thus creating a boom in domesticeconomy. Fears of cheaper chinese goods competing withexpensive indian ones in domestic/international markets inthe long term may be shortlived because chinese economy andproductivity is three times bigger than india's and the lowcost of chinese products is the making of artificialcurrency fixing/manipulation of chinese currency by thechinese red army government.Recent devaluation of all worldcurrencies including indian rupee versus the chinese one isproof of that and a good sign for all countries competingwith chinese products, since chinese government don't wantto devalue its own to counter resulting economic inflationand potential mass social unrests and riots against risingunemployment there. In the long run even china cannotsustain year after year growth its achieving today as itseconomy is bigger the growth gets slower, thus much of thechinese manufacturing may get shifted to cheaper locationselsewhere, and time is ripe for india to take that advantageby investing in adequate infrastructure required for that inadvance, because india has larger/faster room for growththan china since we have a three times smaller economy.Since in india each state competes with each other (e. gnano case) to get business projects there is less burden ongovernment to spend which is advantage for india since thoseresources could be better allocated to social, education,healthcare and other value driven productiveprograms.Infrastructure is the single biggest thing thatindia lags behind china by leaps and bounds since china madea headstart with economic liberalisation 25 years ahead ofindia and china has a proactive government which has lesshurdles of democracy to deal with to fast track infrastructure projects and social spending unlike thepolitical bickering/whining that happens in indian politicsto get a simple thing done ( plz do not blame democracy,since there are many democracies functioning better thanindia though not with the size of indian population ofcourse). Thus infrastructure development either by privatesector or public sector or combination of both needs to beaddressed ASAP. We cannot waste a single second, accordingto projection by a india born American professor if we startinvesting in infrastructure NOW ( time is right since now,world commodity prices ( steel, copper etc.) is low due toless demand in this time of global economic recession) ,then by year 2020 india would achieve the same status aschina of today (so we still be behind china by 10-12 yearsthen). Besides we still have to address the massive numberproblem of poverty in india which china has almostsuccessfully achieved. So need of the moment- INFRASTRUCTUREand POVERTY. Hopefully politicians and VOTERS of nextelections are listening. Jai Hind.

Is there a good opportunity to SIP here? I am finding Punjab National bank, Axis Bank, OCB very very cheap. is it good to invest? What is your opinion also on IDFC, SREI infrastucture and Reliance Capital?

MY VIEW:

In deed, as you said Banking sector has witnessed sharp correction in last 1 month or so. Non-Banking Financial Institutions were also affected by this sharp slide.

Most of the Banking stocks are quoting around their October lows or even below such levels. Even leading large-cap Banking stocks like SBI and HDFC Bank could not shield themselves from this slide.

I feel Banking stocks have corrected quite a bit relative to market in general.

Fundamentally, this is good time to start 'ACCUMULATING' Banking stock on every larger dip. SBI is quoting at lucrative valuations & levels. Though, HDFC Bank is still not very cheap even after correcting sharply since levels of a month ago.

These 2 stocks (SBI & HDFC Bank) are two the best stocks to fall on from the Banking lot. PNB is second largest Public sector bank with good fundamentals.

But, Technically, Banking stocks are looking even weaker after the more recent crash. Most of these stocks have breached their October lows & could well have another 5-7% in the near term and 10-15% in the medium term horizon for a little more of downside journey.

If you're a long-term investor, dont fall on Technicals to time your 'ENTRY' into these stocks. Start nibbling at current levels & more on every larger dip. The valuations of most of the PSB's are already at reasonable levels. Wait a bit before entering in Private banks, until their valuations erode a bit more.

NBFC:

Your second part of the query related to IDFC, SREI & Rcapital.

IDFC is a leading Finance company for Infrastructure companies. Its valuations have taken a big knock below Rs.50 levels. Its a good pick to start 'ACCUMULATION'. Again its Oct lows of Rs.45 could act a sa crucial support, below which it sets back in negatiove territory. RCapital is easily a good 'ACCUMULATE' for long-term at current levels.

NOTE: If you are investing for Long-term based on fundamentals of the company, do understand that recovery in markets is almost ruled out at least for next 1-2 years. So, block your money while investing in equity stocks if you have patience to remain invested for such periods of volatile times.

Track this Space for Latest Updates on this Blog & Markets

Date: January 30, 2009.

My ViewWith Union Budget round the corner, one can expect Nifty to remain range bound from 4750-5050 & take a directional cue after the Budget outcome. The post-budget bias could be tilted towards the downside as FM could be gearing to withdraw selective sops given to the industry during the recent slowdown & pull the economy out of record deficit.